How Prices Move: The Equation For FOREX Price Movement
Most novice traders fail to understand how and why prices really move.
Here we will give you an introduction to how and why prices move and how you can take advantage of these movements for profit. Let's look at some key points in relation to how and why prices move.
Markets Do NOT Move To a Scientific Formula
Firstly, let's get rid of this myth.
Many traders believe this and numerous vendors on the net perpetrate the myth of markets moving to a scientific law which appeals to the greed and naivety of traders.
Common sense tells us that markets don't move scientifically:
If markets moved scientifically, there'd be no market as we'd all know the price beforehand. Any free financial market including FOREX market by its very nature, involves uncertainty - that's what makes a market move - the fact that human nature is not in any way predictable. If you think about it, how can people who are emotional ever be predicted with certainty? They can't and this should be obvious to anyone with average intelligence but I see clever people who believe this myth. If you believe it, don't trade currency markets - because you will see your trading account get wiped out quickly.
Trading the Odds for Profit
While you are not trading certainties but that doesn't mean you can't make a lot of money, you can - by trading the odds.
With a sound trading method that runs profits and cuts losses quickly you can build significant long term wealth.
It is no coincidence that many of the world's top traders started out as either blackjack or poker players. The reason for this is - any good card player knows he won't win every hand but if they bet when the odds are in their favor and fold when there not, they will make a lot of money longer term.
Trading is simply an odds game.
If you know how to calculate the odds correctly, you can win and build significant long term wealth. Let's look at how to get the odds in your favor.
Price Movement – The fundamentals
Many traders like to trade off news stories and watch the fundamentals, it's popular but will trading news stories make traders money? Let's find out.
A currency trader, who makes trades based upon fundamental analysis, will look at the supply and demand situation relevant to the particular currency studied, and try and predict the impact of such factors as:
- The health of the economy
- Economic policy
- Interest rates
- Balance of payments
- Trade deficit
- Political factors
And many more. On the face of it, fundamental analysis provides a logical and rational basis for investment decisions and the fundamentals do tend to move long term trends however there are problems in applying it and traders who try and trade off the news generally lose and the major reasons they lose are due to two factors:
1. Markets Discounts
We live in a world of instant communications where traders can and do get the news in a split second - the fundamentals are quickly discounted and the market is looking to the future. By the time you have seen, studied and acted on the news - it's probably already been discounted.
2. Investor Psychology
Another major problem is that the fundamentals are there for all to see but individual traders all reach different conclusions based upon what they have seen furthermore, humans are not logical beings.
Prices reflect the fundamentals but they also reflect the emotions of the participants and investor psychology is THE major influence on price.
The equation for market movement is simple:
Fundamentals (supply and demand factors) + Traders View of the Fact (investor psychology) = Market Price
Making Money from FOREX Price Movement Best Trading Strategy to Use
the best way to make money trading currencies for most traders is to use a system based upon technical analysis and it's a great method for beginners because it's simple to understand, easy to learn, takes very little time to use and of course can make big profits. So are there any disadvantages of using technical analysis?
Not really but you have to be aware of its limitations and this means understanding that your trading rules will lose money for long periods when, market conditions don't suite your rules. The best strategy in terms of technical analysis to use is one based upon following long term trends. Sure you will make money when a currency pair trends but when market trade in tight ranges you will get false trading signals and lose - you just have to be disciplined and patient and ride them out, until trends emerge you can make money from.
Any system will have losing periods, so don't believe in the 'holy grail system' it doesn't exit. Traders are always looking for it but it doesn't exist to don't try and find it. Get a simple logical system, you understand and learn to be patient and disciplined, you will make huge profits trading currency markets.
Fundamentals they are Important
Over the long term the fundamentals tend to drive the long term trends you see in any currency pair but in the short term, the emotions of hope, greed and fear will push prices to far away from the average or mean price. If you look at a chart you will see this happen all the time - prices spike short term and then come back to the longer term average. This is just a reflection of emotions of traders pushing the prices in the short term
When trading I like to trade off currency charts but always like to know the conditions behind the moves so can get an idea, of how far prices are from fair value and also the strength of the trend. I like to know the odds of the trend continuing and if you look at the fundamentals, you will get advance warning of trend changes. Most of the top traders in the world, combine fundamental and technical analysis together, to improve the odds of success and you can learn to do it if you want to.
A Brutal Arena But One You Can Win In
Trillions of dollars are traded each day and prices are volatile as they move in reaction to the fundamentals supply and demand facts and traders views of them. Most traders who try and take advantage of this price movement lose but you can win, if you keep some simple facts in mind which will never change:
Markets will always trend long term and you can see this on any currency trading chart and these can be traded for profit.
Fundamentals drive prices long term but human emotion is more important in the short term and creates short term price spikes away from fair value which can be traded for profit.
Because humans determine the price of any currency and human nature never changes,, you can trade it for profit.
While the markets look chaotic and it looks like total anarchy, if you look more closely you will see that humans as a mass can and always will create high odds set ups you can trade for profit. This is not scientific movement but movement you can use to take advantage of high odds set ups you can trade for profit. Market movement in currency markets has always be driven by the same inputs and always will be and you can learn to trade currencies for profit if you understand this.
You will find more information on this site on how and why currencies move and should check out our Introduction to Technical Analysis and also explore Currency Charting Methods for Profit. Anyone can trade and win, if they understand the factors which move currency pairs and develop, a trading strategy, to turn these moves into profit.